Industry insiders say global sugar production is highly likely to decline in 2015/2016

As international raw sugar import channels become increasingly open and domestic raw sugar processing capacity expands, the influence of international sugar prices on the domestic market has grown accordingly, and the correlation between the two markets has begun to increase. However, since 2015, the domestic and international markets have moved in opposite directions: international sugar prices have continued to fall, from a high of 16.16 cents/lb to 11.91 cents/lb, while domestic Zhengzhou sugar futures prices rose from 4,636 yuan/ton to a high of 5,445 yuan/ton.

The logic behind this is the shrinking of domestic planting area and the confirmation of the production decline trend. CITIC Futures analyst Gao Wang pointed out that in the 2014/2015 crushing season, China's sugar production fell sharply, with national sugar production estimated at around 10.5 million tons, down 2.8 million tons from the previous crushing season, a decline of 21%, providing strong support for sugar prices.

⟦NL> On the import side, sugar is currently subject to automatic import licensing management. According to CITIC Futures, the in-quota volume should be 1.3 million tons, and outside the quota, the industry self-discipline volume is 1.9 million tons, which must be imported in a rhythmic manner according to market conditions. Excluding 400,000 tons of Cuban sugar, the estimated circulable volume is 2.8 million tons; combined with 1.9 million tons of carryover inventory from the previous crushing season and 1 million tons of raw sugar carried over, total supply is estimated at 16.15 million tons, consumption is estimated at 15 million tons, and circulable inventory is about 1.15 million tons. “A large portion of this 1.15 million tons is expected to be raw sugar, and later sugar prices will largely depend on consumption conditions, import volume and import rhythm.”

In 2014/2015, based on Guangxi sugarcane at 400 yuan/ton, the minimum white sugar production cost was above 4,400 yuan/ton, but some enterprises were even at 5,000 yuan/ton, with a midpoint of 4,600-4,700 yuan/ton. Considering increased financial costs, the industry needs 4,700-4,800 yuan/ton to achieve industry break-even.

Industry insiders believe that the domestic production decline in 2014/2015 is confirmed, domestic production will continue to decline in 2015/2016, and state reserve inventory will fall rapidly in 2016.

Compared with the domestic market, which has already entered a production decline cycle, the international sugar market remains in oversupply, but continuously falling international sugar prices have already affected international sugar crop production.

Sun Tong, founder and CEO of Brick·Agricultural Products Group Purchasing Network, pointed out that on the foreign sugar side, in the short term, due to India and Pakistan exporting raw sugar through subsidies, plus the continued depreciation of the Brazilian currency, Brazil's raw sugar production cost has fallen to 12-13 cents, and Thai sugar exports are sluggish. In the short term, there is an opportunity for prices to fall to 12 cents or 11 cents, but continued low prices have severely dampened the production enthusiasm for sugar in Thailand and India.

He believes that global sugar production is highly likely to decline in 2015/2016. In Brazil, drought occurred in the summer (Southern Hemisphere) of 2013/2014, affecting sugarcane growth, and coupled with reduced new investment in sugar crops, Brazil has a relatively high probability of production decline in 2015/2016. Global sugar supply is gradually shifting from surplus in past years to a deficit. Looking ahead, international sugar prices are expected to rebound to 15 cents by the end of 2015.

Nanhua Futures analyst Wang Jianfeng also pointed out that Brazil, as a major producing country, has indeed seen slow increases in sugarcane production in recent years, but raw sugar output has not increased in tandem; instead, some of it has gone into fuel ethanol. The cycle of production increases and decreases is based on planting profits. At current prices, international sugar prices have not yet pushed sugarcane planting into a loss. Perhaps in the next crushing season, a corresponding production decline will appear.

“In the medium to long term, sugar prices have entered a new upward cycle. In the short term, because sugar prices have risen too quickly over the past month or so, some risk has accumulated, and the domestic-foreign price spread is too wide. Maintaining the current excessively wide domestic-foreign price spread will be somewhat difficult, and appropriate attention should be paid to pullback risk.” Sun Tong said.

Gao Wang said that in the long term, China's sugar is in a destocking stage, and the view of maintaining a long-term upward trend remains unchanged.